Traders: Stop Freaking Out and Just Start Doing Nothing

by Jeff Reeves | August 18, 2012 7:00 am

Recently, John Wasik penned a column for Reuters with the headline, “Cash not king for the risk averse[1].” He wrote about the trend to avoid selling out entirely but rather to chase the next big thing — dividend stocks, bonds, whatever.

Here’s a great line from his closing:

“Instead of beating a hasty retreat to cash every time a sour headline emerges on the U.S., European or Chinese economy, if you’re a long-term investor focused on inflation-beating growth, you could avoid the opportunity risk trap. Then you wouldn’t have to worry whether the current rally or sell-off will last or how to best time your move.”

Individual investors should know better. It had long been chronicled that most active funds underperform the indexes — so if Wharton MBAs and dudes with slick suits and a Series 7 can’t beat the market by trading frantically, that should tell you how hard it is.

In 2011, for example, 84% of active managers underperformed[2]. Yikes.

Beating the market through active trading is not impossible, of course. Some individual investors are savvy enough to cash in on some great calls and great market timing — and they should be proud of their skills.

But for others, especially those with full-time day jobs or a desire to golf and see the grandkids, there is a lot of sense in simply letting it ride in a diversified portfolio over the long term.

I wrote a column in July outlining 7 reasons why investors should stop trading until Thanksgiving[3]. In it, I outlined macro risk and a case for a choppy market in general.

But notice that I didn’t say go to cash. I just said do nothing until the dust settles.

Or as Wasik writes, “You need to consider a well-rounded portfolio of all sizes of growth and bargain-priced value stocks — and more. Nothing is guaranteed going forward, of course. The point is to take a more global view of different asset classes.”

It’s investing 101 — don’t put all your eggs in one basket, and take a long-term outlook.